Taxation and over-regulation have sapped the entrepreneurial energy of western countries. But the worst part of the low growth problem is the training of the workforce.
- Economic growth, not fiscal repression, solves economic problems
- Healthy labor markets favor strong, sustainable growth
- Too many young people learn too little and stay in school too long
Policymakers on both sides of the Atlantic agree that inflation and growth are far better ways to sustain public debt than fiscal restraint and monetary austerity. Of course, that doesn’t mean inflation was the goal when central bankers began conducting expansionary monetary policies.
There is no doubt that inflation helps borrowers and that governments are eager borrowers, but growth is also essential.
Inflation does not affect everyone equally; Instead, it involves significant income redistribution and hits the poor particularly hard. This phenomenon creates winners and losers and is tolerable only if growth is satisfactory and the resulting benefits at least partially offset the losers.
The relevance of the labor market
Let’s focus on growth, where the number of people involved in productive activities and their productivity play a crucial role. It explains why labor market characteristics matter and why one should rejoice when unemployment falls and employment rises. The business world seems to do the opposite and celebrates when the job market relaxes – meaning the unemployment rate rises; this attitude is particularly true of the United States.
Distorting the labor market by paying people not to work is hardly a recipe for growth.
In fact, high unemployment is believed to encourage central bankers to ease monetary policy and make life easier for heavily indebted companies. This attitude is short-sighted. In Europe, policymakers care less about what happens to the labor market: Unemployment is relatively high, but generous European welfare systems provide a robust safety net against tension. That’s why the job markets here hardly make the headlines. This attitude is also questionable, since the distortion of the labor market by paying for non-work is hardly a recipe for growth.
Europe vs USA
As mentioned above, it depends on the number of workers and their productivity. The ‘numbers’ refer to the proportion of the population engaged in productive activities, while ‘productivity’ refers to the results of their labor efforts. In this framework, the US and Europe tell us different stories. Let’s look at the two economies and emphasize three critical issues: participation, skills and education.
As far as the “numbers” go, the US seems to be in reasonably good shape. Unemployment is low (the official unemployment rate is 3.5 percent, the long-term unemployment rate is less than 1 percent) and youth unemployment is tolerable (about 8 percent). In addition, around 81 percent of the employees are full-time employees. However, there are also some spots that are not quite as bright. Chief among them are the increased retention in education and the participation rate — how many people of working age have a job or are looking for a job — which is only 62 percent in the US, about 5 percent down from 20 years ago.
At the same time, job vacancies are high – more than double the 2010-2020 average. This means that potential employers cannot find suitable candidates. The US job market shows that all those willing to work have employment, but many potential workers are not interested in entering the job market: some prefer to stay in school or at home, others do not even try, possibly due to their lack of marketability skills and the low wages they would be offered.
Productivity comes from innovation and skills. Innovation depends on entrepreneurship, which is influenced by institutions (tax, regulation, quality of the justice system). What about skills? Are American workers able to take advantage of the opportunities technology is giving them? Do long school years bring satisfactory qualifications and justify delayed entry into the labor market? In the post-World War II period in the United States, the annual average increase in productivity (production per hour worked) was 2.5 percent up to the early 1980s and 1.6 percent thereafter.
More than 20 percent of students leave the US education system with little or no learning outcomes.
Even if we take the preliminary estimates with a pinch of salt, the impression remains that the quality of the workforce (skills plus work input) has not improved significantly. It also appears that productivity growth was achieved thanks to user-friendly advanced technologies and larger amounts of fixed capital (machines) rather than sophisticated human resources.
In other words, skills haven’t improved much, and production has increased thanks to more machines. In fact, average abilities are low: For example, more than 20 percent of students leave the US education system with little or no learning outcomes. The fact that the US data is similar to that of other advanced countries (and generally below those countries in terms of math) is far from reassuring.
Europe’s weak point
The European situation shows some differences. Here are the key numbers: The European Union’s labor force participation rate is 74.6 percent, higher than the US and rising (it was about 68 percent two decades ago), while the unemployment rate is 6 percent, which compares to Europe is low norms. The presence of part-time workers (about 18 percent of those reported as employed) is similar to that in the US
Labor force participation rates in the EU and the US
Although youth unemployment in Europe has fallen from 25 percent (2012), it is still relatively high (about 14 percent today) and is not likely to fall any further soon. The European ailment seems to be youth unemployment, which probably explains much of the higher overall unemployment rate compared to the US
Education is also a problem. According to the European Skills Index, the education system in the EU median country will only develop 53 percent of the potential of its students in 2022 – with a gap of 47 percent. Among large countries, such a gap is “limited” to 41 percent in Germany, but rises to about 60 percent in Spain, France and Italy. From a historical perspective, this data may help explain the meager productivity growth, which grew at a compound annual rate of less than 0.8 percent over the period 1995-2022 and at less than 0.6 percent over the past decade.
Educational reforms are not in sight, and it will take at least half a generation for the reforms that have been initiated to take effect.
In the EU, a much larger proportion of the working-age population seems to be employed than in the US. However, too many young people in Europe are struggling to find a job – or perhaps not very keen to find one. Education is a key issue: too many young people learn too little at school, and their poor performance leads to stagnant productivity and low growth.
In general, growth rests on three main pillars: entrepreneurship and innovation, machines and people. In the West, taxation and regulation have sapped productive entrepreneurial energies. Gross fixed capital formation (machinery) has suffered particularly in the EU, where the compound annual growth rate of gross domestic product over the past 25 years has been just 1.7 percent. In the USA it reached 3.5 percent.
The worst part of the problem is the people and their education. In the OECD area, more than 20 percent of 16- to 25-year-olds lack elementary language or mathematics skills or both. This percentage is around 20 percent in Germany, while it reaches over 30 percent in the USA. France and Italy are above 30 percent and 35 percent, respectively.
There are no plans for reform, and it will take at least half a generation for the reforms that have been introduced to take effect. Today, a significant proportion of young people do nothing (the OECD average is around 15%), while many young people stay in school too long and learn relatively little. This is happening on both sides of the Atlantic. As a result, performance at work is unsatisfactory.
In the past, massive hiring in public administration could mask the problem and allow the low-skilled to find jobs. The “value added” account (the difference between revenue and the cost of goods and services purchased by a company) in the public sector would feed the illusion that output is growing at cheap rates.
This will no longer be the case in years to come, especially if policies respond to the challenge by lengthening educational careers, rewarding “social skills” rather than studies, and increasing public spending to hire more undereducated teachers.
In fact, added value in the public sector is considered to be synonymous with the wages of employees, since the price of what the public sector sells – eg public health and public education – is well below cost and often zero. So if the government wants to increase the value of what it produces, all it has to do is hire more civil servants and/or raise their salaries.